Shares of Avenue Supermarts Ltd. rose as much as 18.3 percent, the most since its March 21 listing, to a record after Goldman Sachs initiated coverage with a ‘Buy’ on the stock.
The brokerage expects the parent of supermarket chain D-Mart to get a boost from a growing share of organised retail after the Goods and Services Tax rollout. It set a target price of Rs 1,586 for India’s largest retailer by , with a potential upside of 54.2 percent. The stock was trading at Rs 1,201 apiece at 2:15 p.m.
The organised grocery retail’s share is expected to more than double to 7.9 percent in three years to March 2020, Goldman Sachs said. Sales of the Radhakishan Damani-promoted retailer are expected to grow at a compounded annual growth rate of 33 percent during the period, and at 26 percent in the following three years.
Low prices, costs and inventory indicate D-Mart focuses on efficiency, said the report. Despite being 50 percent higher than its “nearest competitor”, Avenue Supermarts’ per square feet sales are expected to grow at a 13 percent CAGR.
Price Comparison
The retail chain sells products at cheaper prices than peers, the report said. For example, Colgate Active Salt 300-gram toothpaste is priced at Rs 114 at D-Mart. Future Retail Ltd.’s Food Bazaar sells it for 7 percent higher.
Also Read: How D-Mart Stacks Up Against Peers
Expanding its reach, Avenue Supermarts plans to increase the number of its neighborhood pick-up points by tenfold to 415 in a little over two years. The biggest risk is from higher-than-expected competition from e-commerce, which is winning over urban consumers, said the report.
The retailer’s valuation at 65 times the expected earnings per share for the financial year 2018-19 appears high. Yet, it does not factor in that the D-Mart parent has a “long runway for growth on the back of its robust business model”.
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